The Spanish economy could contract by 13% in 2020 (see IMF June report) and up to 15% (according to Bank of Spain’s risk scenario) amid the adverse economic ramifications of the Covid-19 pandemic. Although the economy continues to struggle, the housing market has yet to show signs of weakness. On the contrary, housing prices in major cities, including Madrid and Barcelona, remained stable in the past couple of quarters. How can Spain’s housing market, at least in Barcelona and Madrid, remain in check despite the weakness of the economy?
One answer could be the stability of rent prices: Over the past few quarters, rent prices (based on data from Idealista) have climbed. As of Q2 2020, in Barcelona, the average rent rose to 17.6 euro/meter or 8.2% YoY, whereas in Madrid, it reached 16.6 euro/meter or 3.5% YoY.
Source of data: Idealista
Even based on monthly data, as of June 2020, Madrid’s average rent was 16.6 euro/meter – 0.3 e/m higher than in March. In Barcelona, rent prices slid from 17 e/m in March to 16.8 e/m, albeit still higher than the rent recorded in June 2019.
And since many residential contracts are long-term (with standard contract lasts three years), rent isn’t likely to fall by much anytime soon.
Conversely, house prices haven’t changed much over the past year as they have leveled off by the end of 2018 and remained flat.
Source of data: Idealista
As a result, yields (annual rent/house prices) have been climbing since mid-2019 and are at 4.8% in Barcelona and 5.3% in Madrid.
Source of data: Idealista
Rising yields could be why investors are still buying houses. Despite the weak economic environment, rent prices haven’t tanked (yet), so the return on investment for purchasing houses is still high.
Conversely, the returns of alternative investment vehicles, e.g., bonds, have tumbled since the eruption of the Covid-19 pandemic. Since this pandemic may keep bond yields depressed for years, investors seeking opportunities to secure a positive return continue to look at houses. And low interest rates have also led to falling mortgage rates (according to Bank of Spain’s recent data) – making the cost of purchasing a house even more appealing.
Another minor reason might be “early investors” seek to cash in on the weakness of the economy and purchase a house because they believe the housing market is cheaper now than before the pandemic started. Indeed, perhaps some bargains and houses are in better locations and conditions than before – characteristics that aren’t reflected in home prices.
The current disconnect between the slump in the economy and the housing market could converge if the recovery were to take a long time. Even if a vaccine were to become available by December, the Spanish economy would still suffer from the Covid-19 pandemic. And my guess is that market participants in the housing market are still too optimistic about a full recovery by 2021. Even the Bank of Spain doesn’t expect the Spanish economy to recover by the end of 2022.
That’s why I think a lot of sellers are holding their prices – a lot of sellers prefer to hold on and weather the economic storm as long as they can. The weak economy could start to lead renters to demand lower rents. And house sellers may start to offer lower prices as the economic slump progresses.
That’s why I suspect it could take a few more months before we start seeing house prices reflecting the weakness in the economy.
